Gold: Up in volatile trading as the Fed goes for outsized rate cuts
Performance
Spot gold swung wildly in the wake of the US Fed cutting rates by 50-bps at its FOMC meeting concluded on September 18. Gold surged to a fresh record high of $2600 soon after the rate cut announcement; however, it turned sharply lower during the Fed Chair Powell’s presser in which he said that this outsized cut was to ensure that the Fed doesn’t remain behind the curve and he doesn’t a US recession as job market remains strong amid falling inflation which the Fed believes will fall to the Fed’s target of 2 per cent.
In addition, he said that such big sized rate cuts will not be normal as going forward the Fed will decide its monetary policy data by data. As per the latest projections by the Fed, the Central Bank is expected to cut rates by another 50-bps collectively in the remaining two FOMC meetings this year.
US yields and the US Dollar Index surged on no recession talks, which sent the yellow metal to $2547 in today’s Asian session. However, the metal recovered almost all its losses in the European and the US session as traders embraced the 50-bps cut and the US Dollar Index fell amid stabilising US yields and healthy risk appetite.
Spot gold is trading with a hefty gain of 1.18 per cent at $2589 at the time of writing this report. MCX October gold contract at Rs 73,450 is up 0.54 per cent on the day.
Data and event watch
Today, as expected, the Bank of England kept its benchmark interest rate unchanged at 5 per cent. The UK’s annual CPI (August) was noted to be 2.20 per cent Vs the forecast of 2.40 per cent, though services inflation jumped from 5.20 per cent in July to 5.6 per cent in August, which has forced the Central Bank to adopt a gradual approach to rate cuts.
The US current account balance (Q2) came in at -266.80 billion Vs the forecast of -$260 billion. Philadelphia Fed Business Outlook (September) at 1.7 was better-than-expected data of 0. Weekly job data were encouraging as initial jobless claims came in at 219K (forecast 230K), whereas continuing claims were reported to be 1829K (forecast 1850k). Existing home sales (August) at 3.86 million lagged the estimate of 3.90 million though.
US Dollar Index and yields
The ten-year US yields rose for the third consecutive day and were seen at 3.74 per cent, up 0.88 per cent on the day; however, the two-year yields at 3.61 per cent are almost steady.
The US Dollar Index fell to 100.22, the YTD low on the Fed’s rate cut decision; however, it recovered its losses to rise to 101.47 as the US yields surged, though it eased nearly 0.70 per cent to 100.70 as risk appetite remained healthy. It is down nearly 0.30 per cent on the day.
Upcoming data and event
Today’s major data on tap include Japan’s national CPI, UK’s retail sales, Euro-zone’s consumer confidence and Germany’s PPI.
Bank of Japan and People’s Bank of China will deliver their monetary policies today. No major change is expected but Bank of Japan’s statements and forward guidance may influence the markets.
ETF
Total known global gold ETF holdings edged higher on September 18 to 83.371 MOz, the highest level since mid-February.
Geopolitical watch
After two straight days of device explosions across Lebanon and the region, Israel launched airstrikes on Hezbollah targets in Southern Lebanon; however, Israeli ground forces have not crossed border yet. As per Lebanon’s health ministry, 37 people were killed and thousands more were injured. Fear of an all-out war between Israel and Hezbollah have gripped the world leaders and markets.
Outlook
The US Fed cutting rates by 50-bps somewhat unexpectedly is positive for the metal. Although the Fed has said that the cuts going forward will be measured and data-based, markets expect faster cuts as the US job market is deteriorating. Heightened geopolitical tension is yet another supportive factor. ETF inflows remain healthy. Next week will be crucial as we have got the Fed chair speech, US GDP and PCE inflation data on the cards. Overall, gold is expected to trade with a positive bias as traders eye $2700. Support is seen at $2547 (Rs 72,300)/$2530 (Rs 71,800). Resistance is at $2600 (Rs 73,700)/$2650 (Rs 75,100).
(Disclaimer: Praveen Singh is Associate VP, Fundamental Currencies and Commodities, Sharekhan by BNP Paribas. Views expressed are his own.)
First Published: Sep 20 2024 | 10:20 AM IST